Could Tax Reform Affect Your Contracting Business?

A calculator and a note with the word tax time on it.

If you prepared to start your business under tax rules that ended in 2017, you should know that a lot of factors are about to change, especially for businesses. From tax rates on businesses to the kinds of deductions homeowners are allowed to claim, tax reform has the potential to influence the way you run your business, as well as demand in the construction industry. Here are a few ways that your business as a contractor might be affected by the new tax laws.

Business Tax Rates

As you are probably aware, there are many different types of businesses that you could run, as far as your taxes are concerned. These types include:

The first in this list received, as of 2018 laws, a tax cut from 35 percent to 21 percent for the corporation. The remaining three are known as “pass-through entities,” meaning that they don’t pay corporate taxes, just pass the income to the owners to be taxed as individual income. If your business is structured this way, you may be able to claim the new Qualified Business Income Deduction on up to 20 percent of your business’s profits.

Private Activity Bonds Subsidies

Larger construction projects that may present some benefit to a city or state can be very expensive, and there are a couple of ways to fund them. Private activity bonds are funds that are often issued by the local or state government but owned by a private entity, to finance a project that citizens will use, such as a new sports stadium on private property. These bonds have been tax-free, which encourages their use and has a role in boosting construction activity in the region. The recent tax reform didn’t change the tax-exempt status of the bonds, which experts believe could have caused a decrease in municipal or state construction projects.

Property Tax and Mortgage Interest Deductions

The changes to the property tax and mortgage interest deductions could present some limitations on the construction industry in high cost-of-living areas, including many regions of California. Property tax deductions are now capped at $10,000 per year. The mortgage interest deduction is now restricted to mortgages up to $750,000, instead of the former $1 million. The new limits might affect you personally, based on the property you own. Experts claim that they may also cool interest in building in some areas where the cost of housing and property taxes exceed these limits. Lower demand for new housing could ultimately decrease how much business you can find, depending on where you run your business.

Changes for Employees

Although the tax reforms that got the most attention in the news concerned businesses, there are also many changes to individual taxes that could alter your employees’ tax liability. Tax law eliminated personal exemptions and nearly doubled the standard deduction. The tax brackets have changed, and many people who earn less than $157,500 filing single will notice a decrease in their individual tax rate. There are some changes to credits that may also affect your employees, such as the doubling of the child tax credit from $1,000 to $2,000.

Accounting Concerns

Any time there is a major change in tax law, the way that you account for your business’s income may need a serious overhaul. Since the current way to approximate appropriate withholding is based on the number of personal exemptions a person might take, the Internal Revenue Service must rewrite the way that it structures withholding guidelines. With tax reform not becoming law until Dec. 22, the IRS says that it will not have new guidance until sometime in January, and will encourage businesses to alter their withholding systems by February. If you are not already planning to contract with a professional accountant or a payroll service to handle these financial concerns, tax reform might make a wise choice for this year at least.

Gaining a thorough understanding of the ways that tax reform might influence your business is crucial to the running of a successful construction company. The CSLS corporation setup service can help you decide which kind of business will be most appropriate for your needs. To get started building great business prospects for 2018, contact CSLS today!